UBS’s Jeffrey Palma called it on Monday. Hedge funds (those that got out soon enough), mourn:
New developments - weak global growth, falling interest rates, lower commodity prices and a surging US dollar-are fundamentally changing the risk-reward picture in financial markets. For example, the unwinding of long commodity/short financial sector positions is a key development. The (positioning) link between these sectors has been broken. While the natural tendency is to question the right time to re-enter this trade, we think this is the wrong focus. Times have changed. We believe investors will be better served looking outside of this space for sustainable opportunities.
In short, the investment landscape may feel the same but, in fact, it is changing. Specifically, we believe that investors need to re-orient their portfolios to exploit a continuation of three interrelated trends: lower interest rates, a stronger US dollar and weaker global growth
Specifically, weaker non-US demand means appetite for oil is falling and is likely to continue to do so, according to Palma. Weaker oil itself is not a reason to buy banks, he says, and although CDO-related writedowns may be nearing an end, credit risks are spreading.
Palma is therefore neutral on the financials and underweight on energy/materials. Instead he recommends reorganising portfolios along the lines below - investing in US government and corporate bonds and some equities (like telecoms and technology).
If he’s right, it means hedge funds are going to have to start getting a bit more creative. FT Alphaville notes with interest the recent success of volatility-based hedge funds - up 7.3 per cent in August, according to Bloomberg. Perhaps options contracts are the next herd to flock to.
Related links:
Simplify, semper fi to the USD - FT Alphaville
(Still) Waiting to rotate - FT Alphaville
